Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
You can access both of our platforms from a single Saxo account.
How do changes in US real yields impact asset classes?
Peter Garnry
Chief Investment Strategist
Summary: Negative US real yields have been argued is the main reason why equities are rallying despite weak economic data, but that narrative is not the full picture. Our analysis shows that equities get very sensitive to large changes in US real yields and that it drives large positive returns in US equities. In other words, equities have historically been a good hedge against large changes in US real yields. This means that we are less worried about equities should US real yields creep higher again. The biggest casualties would most likely be gold, EUR and JPY.
Last week we wrote about low US real yields and their a priori impact on growth stocks. From a theoretical perspective low interest rates causes an exponential impact on market valuation of companies with a stable growth trajectory and low variance in future cash flows. We used Microsoft as an example to show how the market was increasingly pricing technology stocks as bond proxies. In today’s research note we broaden our analysis of US real yields and show how they impact asset classes but also how sensitivity changes for technology stocks depending on the changes in real yields.
The average response shows no link between rising equities and falling real yields
When we measure daily changes in the US 10-year real yield (US 10-year yield minus US 10-year breakeven yield) against a variety of asset classes we observe the expected sensitivities to changes in the real yield. When the real yields decline gold rises, USDJPY declines and EURUSD increases. Equities across the board have a positive sensitivity to changes in the real yield which fits with the hypothesis that rising real yields are a positive sign for economic growth and thus equity values.
Many would argue that it does not fit if they overlay the inverse real yield with the NASDAQ 100 Index. But the reason why cannot do that is that US real yields is not a stationary time series since 1999 and thus this method would be flawed. We are left with analysing changes in the US 10-year real yield and daily changes in asset classes.
It is all in the tails
Instead of only measuring the average response between change in the US real yield and daily changes in asset classes, which is what we are doing in a correlation analysis, we can do a quantile regression and measure the sensitivity across the entire distribution of US real yield changes. Our hypothesis has been that plunging real yields have driven up long duration assets such as gold, growth stocks and real estate. As the plot of our quantile regression fit of daily changes in NASDAQ 100 against daily changes in the US 10-year real yield shows, the sensitivity to changes in the real yield is almost twice as large in the tails (both positive and negative) compared to when real yields are hardly moving. This means that when the US real yield is changing a lot it has a large impact on the daily returns in the NASDAQ. In both cases it leads to higher positive daily returns in NASDAQ 100 which makes equities an unique asset class relative to changes in the real yield compared to other asset classes.
In other words, the persistent decline in the US 10-year real yield over the past 60 trading sessions is what is likely driving some of the gains we are observing. Outside the regimes of larges changes in the US real yield the NASDAQ 100 is driven by the underlying expectation for profit growth and other factors.
In the case we see a reversal in the US real yield we would expect gold, JPY and EUR to come under pressure, but also high yield corporate bonds. Depending on the size of the move equities could hold the line except many in some of the most speculative segments of the equity market.
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...